Preventing Startup Fratricide - Who to Trust

I know that this sounds paranoid – I don’t think someone is out to get me (well maybe). In business you have to watch your back and often it is hard to know the people you can trust.  There are individuals motivated by the wrong purposes. Intentions are not always clear and frequently hidden.

I found through the years that it is often hard to tell the good from the bad and the ugly if you are not careful. For this reason, you need to de-risk your venture with the best possible hires, independent board members and investors. It is often easy to settle for the money at hand or to forget the importance of a truly independent director or a first class executive. If your goal is to surround yourself with the best people for a particular type of venture, your bad hires/relationships will be mitigated. You will not be perfect, but you will have enough rational thought in your company to prevent internal destruction. At that point, only the market can defeat you or you defeat it.

Too many companies are destroyed internally before they can succeed in the market through maneuvering, politics and irrational behavior. You can see all these traits in many organizations and they are greatly magnified/ intensified in a startup. This issue is why the best investors invest in people as much as ideas. Everyone will say that they invest in people/ teams  - it is easy to say and hard to really mean.

Sometimes you have to receive a few prior scares to see things clearly. What I have said here is not new - many people in the investment community and startup world say it. However, companies still run into trouble every day because they don’t mean it.

Here are the rules:

1.     Every executive hire matters a lot – hire the best you can find and don’t settle. Speed matters, but hires matter more than speed. This is the “speed” exception for a startup because in most cases speed is of the utmost importance.

2.     Make sure your investors and directors meet the same quality as your hires. If you would not want to hire them, why take their money or put them in a position of influence? Speed once again matters less than quality.

3.     If you hire the best and work with the best, trust is not something you need to focus on as much. Rational thought will prevail and you will be free to live or die in the market without the fear of fratricide.

fratricide [ˈfrætrɪˌsaɪd ˈfreɪ-]

n

1. the act of killing one's brother

2. a person who kills his brother

3. (Military) Military the destruction of or interference with a nuclear missile before it can strike its target caused by the earlier explosion of a warhead at a nearby target

[from Latin frātricīda; see frater¹, -cide]

 Neal

Angel Versus Venture

I have met with numerous founders over the last year. The one thing I have encouraged all of them is to closely consider how to finance their companies.  The repeated question is should they angel or venture finance and who are the best investors?

I deeply believe that almost every founder should try to bootstrap his/her company until some meaningful customer traction is achieved. A couple ventures ago, I made the mistake in taking money early before a business model or product was established.  Bottom line - raising money early gives you less time, less ownership and less flexibility.

When you take money, the price and pressure changes. On the venture side, you need to build to a large meaningful exit to make the economics work for all involved and this is not a bad thing. Your personal economics can be very compelling if you can reach a large outcome in a venture company. On the other side, you can have the flexibility to sell for $15 million and have a similar economic outcome in an angel-financed company.

So how do you know what to do?

1.     I submit that for most companies in the founding stages, you don’t know. I think every company should start the same way –founder dollars and sweat equity until some pertinent traction is achieved. At this point, you are in the best position to negotiate with investors (angel or venture).

2.     After initial momentum, you have to ask yourself realistically does this company have a big enough market and the need for large capital to the point where a smaller piece of the pie will result in much better economics than going it alone? If you are raising money to meet payroll or ease your personal economic burden, you are doing it for the wrong reasons.

3.     To take on venture, you must be comfortable with not selling the company for 10-15 million and be confident enough in your decision.

4.     As you raise more money, you lose more control. This is a very uncomfortable thing for a founder. If your dream is big enough, you may have to lose control to gain critical mass. However, having a company with traction from the beginning will mitigate the dramatic loss of control. Also, don’t just take money from the venture person with the best terms. All venture people (as with angels) are not created equal. If your company is desirable, you will have a competitive situation and you should take your time to find the best fit by speaking with other successful founders. Venture firms will do due diligence on you – you must also do it on them. All money is green, but investor behavior can make or break your dream.

I could write a book on this topic, but the key ideas on when to seek venture versus angel are pretty simple:

·    Build it yourself first to prove it is real then consider all the factors above when making the decision to continue or change investment paths. Don’t forget with whom you invest often matters more than the best terms.

Neal